USD/CHF tumbles to near 0.7650 amid US trade policy uncertainty, Fed independence concerns
USD/CHF softens to near 0.7650 in Thursday’s early European session. Unpredictable US trade policy, questions over the independence of the Fed, and geopolitical risks weigh on the US Dollar. Fed left the benchmark federal funds rate unchanged at its current range of 3.5% to 3.75% at the January meeting.The USD/CHF pair attracts some sellers to around 0.7650 during the early European session on Thursday. Worries about the Federal Reserve (Fed) independence, concerns over another US government shutdown, and ongoing geopolitical tensions provide some support to the safe-haven currencies such as the Swiss Franc (CHF) against the Greenback. The Swiss December Trade Balance and US weekly Initial Jobless Claims will be released later in the day.
A partial U.S. government shutdown is increasingly likely this weekend as federal funding for certain agencies is set to expire after January 30. The New York Times reported on Wednesday that US President Donald Trump and Democratic Senator Chuck Schumer tried to reach a possible agreement to negotiate new restrictions on federal immigration agents.
Meanwhile, US aircraft carriers and supporting warships have arrived in the Middle East. Trump on Wednesday urged Iran to “come to the table” and negotiate a “fair and equitable deal,” or the next US attack would be far worse. Heightened tensions between the US and Iran could boost the safe-haven flows.
As widely expected, the Fed on Wednesday decided to leave interest rates unchanged, breaking a streak of three straight rate cuts amid uncertainty over the labor market and inflation. Fed Chair Jerome Powell said at a press conference that policymakers "see the current stance of monetary policy as appropriate to promote progress toward both our maximum employment and 2% inflation goals.” The cautious stance from the US central bank might help limit the USD’s losses in the near term.
The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.
Why is the Swiss Franc considered a safe-haven currency?The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.
How do decisions of the Swiss National Bank impact the Swiss Franc?The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.
How does economic data influence the value of the Swiss Franc?Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.
How does the Eurozone monetary policy affect the Swiss Franc?As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.